What is a Lifetime ISA?
Lifetime ISAs are a type of account that help you save for two very important goals – your first home in the UK, and your retirement.
As well as being a tax-free ISA account, the government hands you a generous 25% bonus on the money you pay in. However, if you choose to use it for another reason, you could face a 25% penalty charge on the total money in your account, meaning you could end up getting back less than you put in.
You can apply for a Lifetime ISA if you’re age 18–39 and a UK resident. And once you’ve opened an account, you can continue to pay in until you reach age 50. Watch our Lifetime ISA explainer video below for a quick summary of how it works.
How does a Lifetime ISA work?
You can pay in up to £4,000 per tax year into a Lifetime ISA. This £4,000 usually counts towards your overall £20,000 ISA annual allowance.
Let’s look at the main advantage of a Lifetime ISA: the bonus. This 25% top-up from the government gives you up to an extra £1,000 each year to help you invest towards your goal.
Just remember that although you can have a Lifetime ISA with more than one provider, you can only pay into one account each tax year.
However, transferring between Lifetime ISA providers won’t affect your annual LISA allowance. For example, we’re one of the only providers that accept transfers in for people who’ve turned 40 since they opened their original LISA. Learn more about transferring over age 40.
How many Lifetime ISAs can I have?
You can have more than one Lifetime ISA open with different providers, but bear in mind that you can only pay into one each tax year. This rule applies whether you hold a Lifetime ISA in cash or investments, as a Lifetime ISA is classed as one type of ISA account.
What can you use a Lifetime ISA for?
You can use a Lifetime ISA for two main purposes: to help you save for your first home, and/or for later life.
Buying a house
You can withdraw money from your Lifetime ISA before age 60 penalty-free if you're using it to buy a first home in the UK. But there are a few restrictions you need to keep in mind:
- You must be a first-time buyer. This means you can’t own, or have owned, a home in the UK or overseas.
- The Lifetime ISA needs to have been open for more than 12 months – the clock starts from the date of your first payment in.
- The home must be worth no more than £450,000.
- You must be buying a home you plan to live in – not a holiday home or somewhere you’ll rent out.
- You must use a mortgage.
Buying a property together?
If you want to buy a home with your partner and you both meet the eligibility criteria, you can combine your Lifetime ISAs to buy a property together, so long as the property price is less than £450,000.
(If only one of you has a Lifetime ISA, then that also works, as long as the property still meets the above rules).
Investing for retirement
Once you’re 60 or older, you’ll have full access to your Lifetime ISA, free of any tax or penalties.
So how does a LISA weigh up against a traditional pension? Using a LISA for retirement might be of more interest to you if you’re self-employed, as you won’t currently be getting any employer contributions into a pension. You’ll need to compare the tax relief top-up you’d get on money paid into a pension to the 25% bonus on a Lifetime ISA to see which option might be best value for you.
For basic rate taxpayers, the government bonus is the same as the tax relief top-up you’d get on money you pay into a pension. But if you’re a higher rate taxpayer, you could claim more tax relief on what you pay into a pension (up to 45% for some), which could be more valuable than a Lifetime ISA bonus.
When it comes to taking your money out, a main benefit is that you can access it completely tax and penalty-free from age 60. A pension can be accessed slightly earlier (for most people, age 57 from 2028), but only 25% is tax-free. The rest is taxed as income.
If you’re employed, you shouldn’t opt out of your workplace pension to use a Lifetime ISA, as you’ll lose the money your employer saves into your workplace pension. For employed people, a Lifetime ISA is usually only considered as a way of saving for retirement by those who’ve maxed out matched employer contributions, or their pension allowances.
Get rewarded with a 25% bonus
Is a Lifetime ISA right for you?
When it comes to investing, it's important to really know the ins and outs of each account and what you're getting into. A Lifetime ISA might not be for everyone, so before you open an account, take a look at who would most likely benefit.
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Types of Lifetime ISA
There are two main types of Lifetime ISA explained below.
Cash Lifetime ISA
A cash Lifetime ISA acts as a standard cash savings account. You can earn interest on the money you put in, including the 25% bonus.
Stocks and shares Lifetime ISA
A Stocks and shares Lifetime ISA invests your money into assets like shares, funds, bonds, exchange-traded funds (ETFs) and more.
Which is better for you depends on your personal circumstances. For example, an investment Lifetime ISA will be more suitable if you’re saving for the long term – because it’s generally a good rule of thumb to put your money in the markets for five years or more.
At AJ Bell, we only offer a Stocks and shares Lifetime ISA.
What are the benefits of a Lifetime ISA?
As with other individual savings accounts (ISAs), in a Lifetime ISA, your money and investments can grow free from UK tax. But the main Lifetime ISA benefit is the 25% bonus the government add to whatever you pay in. This top-up can be as much as £1,000 a year.
As long as you open a Lifetime ISA before you turn 40, you can continue to pay in and benefit from the bonus every year until you’re 50.
The table below shows how the Lifetime ISA bonus really adds up. For example, if you pay in the maximum amount for five years, you’ll get £5,000 in government bonuses. That’s a total of £25,000 paid into the account, before any interest or growth.
| Years paying in | Maximum you can pay in | Maximum you'll get in government bonus | Total paid into your Lifetime ISA* |
|---|---|---|---|
| 2 | £8,000 | £2,000 | £10,000 |
| 5 | £20,000 | £5,000 | £25,000 |
| 10 | £40,000 | £10,000 | £50,000 |
| 20 | £80,000 | £20,000 | £100,000 |
| 32 | £128,000 | £32,000 | £160,000 |
*Before any growth or charges
Once you reach age 60, you can access your Lifetime ISA tax-free for any purpose and without any penalty.
How does the Lifetime ISA government penalty work?
There’s two ways you can withdraw money from your Lifetime ISA without facing the penalty charge:
- When you buy your first (eligible) home in the UK
- When you reach age 60
You can also withdraw money penalty-free if you’ve been diagnosed with a terminal illness.
If you withdraw for any other reason, you’ll face the 25% government penalty charge. As this applies to the value of the whole withdrawal, it claws back not only the original government bonus, but also some of the money you paid in yourself.
Example
Here's how the penalty charge might be calculated.
Let's say you saved £1,000 into a Lifetime ISA and received a 25% government bonus of £250, but thereafter, you wanted to withdraw money.
Total money in account: £1,250
Later that year, you decide to withdraw £1,250 from your account.
25% penalty charge: £312.50
Amount you get back: £937.50
Total loss you've made: £62.50
The total amount you get back is 6.25% less than the £1,000 that you originally paid in, due to the penalty charge.
So, if you’re considering a Lifetime ISA and you won’t be using it towards your first home in the UK, you need to make sure you’re comfortable locking the money away for the long term.
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More about Lifetime ISAs
Everything you need to know about Lifetime ISAs, from how the government bonus works, to how you can avoid any withdrawal penalties.
Open a Lifetime ISA
Whether you’re buying your first home or saving for retirement, get a 25% bonus up to £1,000 each tax year when you add money to a Lifetime ISA.
Transfer an account
Thinking of moving a Lifetime ISA over to us? It’s easy. We'll just need a few details of your current provider, then we’ll do the rest.
Remember that the value of investments can change, and you could lose money as well as make it. How you’re taxed depends on your circumstances, and keep in mind that Lifetime ISA and tax rules could change.
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